CSS Exam Preparation Manual 2020-06 PDF

CSSExamPreparationManual202006 SANCTIONS REGIME TYPES, GOALS, PROHIBITIONS AND EFFECTS Sanctions Objectives Economic sanctions have traditionally been defined as the “deliberate, government-inspired withdrawal, or threat of withdrawal, of customary trade and financial relations with a target country in an effort to change that country’s policies.” Sanctions Objectives One important aspect of economic sanctions is that they are to a large extent self-enforced, as their effectiveness depends primarily on voluntary compliance. In this way they differ from military measures, such as naval blockades. Sanctions Objectives In general, economic sanctions are used to accomplish political rather than economic goals, although the difference between the two can be subtle. Sanctions Objectives Sanctions may have several different objectives. These include: To deny resources to the target, with the aim of making certain activities, such as terrorism or narcotics trafficking, impossible; To persuade or compel the target to change its practices Imposers of Sanctions Sanctions may be imposed unilaterally, by a single country, or multilaterally, as is the case with sanctions imposed by the United Nations. Imposers of Sanctions Countries may impose sanctions individually, but in coordination and cooperation with allies, as happened with the U.S. and EU sanctions against Russia following events in Ukraine in 2015. Imposers of Sanctions Sanctions are imposed through legal acts. Depending on the country, these may take the form of laws, regulations, executive proclamations, administrative guidance, and administrative and judicial decisions. Imposers of Sanctions A country’s sanctions laws will cover a number of topics, including what types of sanctions are applied; who they apply to (sanctions targets); who must comply with them (sanctions subjects); what the penalties for non-compliance are; and who administers and enforces the sanctions. Imposers of Sanctions pg. 1 The totality of a country’s sanctions laws, addressing all of these topics, are known as a sanctions regime. Imposers of Sanctions The set of sanctions targeting individual countries or categories (such as terrorists or narcotics dealers) are commonly called sanctions programs. Imposers of Sanctions Sanctions can be imposed by any level of government. Sanctions imposed by federal governments apply throughout the country. In addition, subsidiary levels of government, such as the states in the United States, may impose additional sanctions, but these will apply only to the state itself. In the European Union, sanctions can be imposed at both the Union and the national level. Member states must comply with all Union-level sanctions, but can also impose their own sanctions. Subjects of Sanctions Sanctions typically target either entire countries or, less commonly, regions within a country. Sanctions targeted at countries may apply only to individuals and entities within the country, or to nationals and entities of the country world-wide. Sanctions may also target governments (as opposed to countries themselves). Subjects of Sanctions The “subjects” of sanctions are those who are required to comply with them. Sanctions generally require compliance by the nationals of the country applying the sanctions. Subjects of Sanctions This is true wherever they might be located, even if it is outside the country. Persons physically present in a country must also obey its sanctions, regardless of their citizenship2. Entities, such as corporations, organized under the laws of a country must also comply with its sanctions. This is true of their foreign branches as well. Whether or not their foreign subsidiaries must also comply with the sanctions, depends on the sanctions. These types of sanctions are referred to as “direct” or “primary” sanctions. Subjects of Sanctions More rarely, sanctions may impose duties or prohibit conduct by non- nationals, including citizens of other countries or foreign companies operating outside the sanctioning country. These are called “secondary” sanctions. Subjects of Sanctions Comprehensive sanctions employ extensive trade embargoes against the target of sanctions and involve wide-sweeping bans on trade, diplomatic relations, and or other relationships between target and sender. For example, pg. 2 sanctions that prohibit the import or export of goods and services that benefit a country or region. Subjects of Sanctions Targeted or list-based sanctions impose sanctions on specific items or restrictions on a person or on groups of specific people. For example, sanctions that that target specific individuals and entities of a country or region. Subjects of Sanctions Sectoral sanctions: Target a specific industry of a country or region. Common Types of Sanctions Secondary Sanctions Also called “extraterritorial” sanctions; Extend power of U.S. law indirectly, to non-U.S. firms; May directly prohibit foreign subsidiaries of U.S. companies from engaging in certain types of activity; May indirectly target non-U.S. firms by trying to restrict their access to the U.S. market; Create risk areas for non-U.S. companies. Common Types of Sanctions Penalties The duty to comply with sanctions implies that there are penalties for noncompliance. The most common penalties for failing to comply with sanctions are fines. Common Types of Sanctions Another common “penalty” is the requirement that an organization strengthen its internal sanctions compliance system. Common Types of Sanctions Administration What agency or entity administers and enforces the sanctions laws of a country varies by country. Administration may either be assigned to a dedicated agency (as in the United States) or performed by an agency as part of its overall functions (as in Netherlands, for example). Common Types of Sanctions Sanctions programs may be very broad, or quite targeted. Broad programs that prohibit most are all transactions are often referred to as embargos. Common Types of Sanctions Narrow programs, on the other hand, may affect only trade in selected products, such as weapons. Prohibitions or Restrictions on Investment Prohibitions on Imports Imports from the target country or region are prohibited. These may include imports of goods, services, and technology. The prohibition may apply only to selected products, or to all imports from the country in question. Prohibitions or Restrictions on Investment pg. 3 Prohibitions or Restrictions on Exports Prohibitions on exports are another common form of sanctions. There are two common approaches to export prohibitions. One is to prohibit all exporters, although here may be exceptions, such as exports of agricultural products and medicines and medical products. The other is to specify what products are subject to the export ban, with all other exports being permissible. Prohibitions or Restrictions on Investment Exports typically include not just goods, but services and technology as well. Significantly, “services” typically include financial services, which would encompass basically everything banks do, as well as insurance and investment services. Prohibitions or Restrictions on Investment Arms Embargos A prohibition on exports of military items is frequently the first type of sanction imposed against countries. The prohibition will normally cover both arms and items that are used for military purposes. The prohibition may cover either specified items or all goods, services, or technology used by the military. This means that it may be legal to export a product for civilian use, for example, but not for use by the military. Prohibitions or Restrictions on Investment Product-Specific Embargos General prohibitions on any trade in specified products are another common form of sanctions. The objects of such product- specific embargos include bullion, precious metals, luxury goods, and petroleum. Prohibitions or Restrictions on Investment Prohibitions or Restrictions on Investment A country may prohibit or limit investment in another country. This typically takes the form of a prohibition on new investment. The prohibition may be general, or Sectoral Sanctions may apply only to investment in designated sectors. Such prohibitions do not normally require the liquidation of existing investments. Other restrictions, such as those on the export of financial services or on financial transactions, may severely affect the value of investments in sanctioned countries by limiting the ability to repatriate profits from such investments or to provide funds for repairs or expansion of the investment. Sectoral Sanctions Prohibitions on Financial Transactions These sanctions may prohibit any type of financial transaction, including processing payments, making loans, or providing any kind of banking, insurance or investment service. Unlike the previous types, prohibitions on financial transactions can apply to individuals and organizations as well as to entire countries. Sectoral Sanctions pg. 4 Prohibition on Providing Economic Resources At their most sweeping, sanctions may prohibit providing any economic resources to sanctions targets. Economic resources include funds, financial assets, or indeed anything of economic value. This type of sanction is typically applied to individuals or organizations rather than entire countries. Asset Freezes Probably the most far-reaching type of sanction is the freezing of assets. The sanctioning country will require that its nationals (including its banks) freeze funds, financial instruments, other assets, and indeed any property belonging to a sanctions target that come under their control. The party freezing the assets must hold them, typically in a separate, designated account, until directed by the government to release them. The sanctions target continues to own the assets, at least theoretically, but cannot access them. There may be limited exceptions, such as the ability to use frozen funds to pay living expenses. Asset freezes are most commonly directed against individuals and organizations, although they may apply to all property owned by a government. Sectoral Sanctions Sectoral Sanctions A more recent type of sanctions are sectoral sanctions. These are, as the name implies, directed against specific sectors of the economy of a country, such as the banking, energy, or defense sectors. Sectoral sanctions usually apply only to identified companies. They normally prohibit some, but not all, transactions involving those countries and sectors. Circumvention and Facilitation Travel and Transit Restrictions Travel bans are a common type of sanction. They prohibit either named persons or government officials of the target country from entering the country applying the sanctions. There may be exceptions, such as for travel by prohibited government officials to meetings of the UN or other international organizations. Circumvention and Facilitation Transit restrictions may prohibit goods from a sanctioned country from passing through the territory of the country imposing the sanctions, or goods from the country imposing sanctions from passing through the territory of the target country, even if they are destined for a non-sanctioned country. Such prohibitions may include goods being carried on ships or planes that stop in a sanctioned country, even if they are not unloaded, but rather continue on their way to a nonsanctioned destination. pg. 5 Circumvention and Facilitation Reporting Requirements In some cases, sanctions do not prohibit transactions with a target country, but require that it be reported. The United States, for example, requires that companies with publicly-traded stock include a statement as to whether they do business with Iran. The theory behind this type of sanctions is that adverse publicity will convince companies not to do business with target countries, even if such business is not technically prohibited. Circumvention and Facilitation Circumvention and Facilitation Not surprisingly, targets of sanctions frequently seek to evade them. Circumvention and Facilitation Facilitation is similar to circumvention. U.S. sanctions programs generally prohibit U.S. persons (wherever located), or non-U.S. persons located in the U.S., from facilitating transactions by foreign persons when those transactions would be prohibited if they were undertaken by U.S. persons themselves. Circumvention and Facilitation Examples of “facilitation” include: Approving, directing, assisting, supporting, financing or insuring transactions in or with a U.S. sanctioned country; Making any purchase for the benefit of a prohibited transaction; Negotiating with customers/potential customers in U.S. sanctioned countries; Circumvention and Facilitation Participating in meetings or on calls with nationals of sanctioned countries for the purpose of furthering a prohibited transaction; Approving expenses or providing financing related to a prohibited transaction; Arranging freight forwarding, customs brokerage services or similar support services related to a prohibited transaction; and Negotiating, drafting or reviewing commercial terms/contracts related to a prohibited transaction. Types of activities unlikely to be considered by OFAC to constitute unlawful “facilitation” include the following: Seeking legal advice regarding the application of U.S. sanctions law to proposed transactions (but beware certain actions taken in furtherance of such advice); Transactions carried out independently by a foreign subsidiary, with no involvement by U.S. persons, wherever located, or non-U.S. persons located in the U.S.; or Providing back office shared functions by U.S. persons, wherever located, or non-U.S. persons located in the U.S., as long as these activities are purely clerical and do not specifically relate to a prohibited transaction. Facilitation provisions under U.S. sanctions programs are measures that make it an offense for any U.S. person to approve, facilitate, guarantee or finance any transaction by a foreign person where the transaction by that foreign person would be prohibited if performed by the US person. In summary, U.S. sanctions laws prohibit persons subject pg. 6 to a sanctions regime from assisting a foreign person not subject to that sanctions regime from undertaking an action that would be prohibited if performed by the subject person. Facilitation is also discussed in Chapter 4. Iranian Transactions and Sanctions Regulations, Family Remittances Exceptions to Sanctions The precise scope of sanctions differs by country and program. Certain exceptions to sanctions are common around the world, though. These include licenses and exemptions. An action is exempt from sanctions if the sanctions laws simply do not apply to it, or otherwise authorize it. Family Remittances Common exemptions include transactions involving mail and telecommunications, humanitarian donations, family remittances, and payments for overflight privileges. A license, on the other hand, is permission to perform an action that would otherwise be prohibited. Licenses may be specific or general, Family Remittances Post and Telecommunications Sanctions laws almost always allow communication with a sanctioned country, whether through the mail or via telecommunications. The latter includes e-mail and text messages as well as telephone calls. As part of this exemption, telecommunications companies are commonly allowed to make payments to government authorities in sanctioned countries, as well as to local telecommunications providers. Precisely what is allowed, however, can be complicated. Moreover, the exemption for telecommunications does not necessarily allow investment in the sanctioned country in the equipment needed to carry telecommunications. Family Remittances Humanitarian Donations Donations for humanitarian purposes are another frequent exception to sanctions laws. The potential for misuse of this exception is obvious, though, so that donations may be restricted or prohibited under some circumstances. The details of the exemption will specify what types of donations are allowed (such as food, medical supplies, tents and blankets), as well as what types of organizations can receive such donations. Family Remittances Family Remittances A less common exemption is for family remittances. The theory is that sanctions should not prevent families from supporting each other. Again, the potential for abuse is obvious. Exceptions for family remittances commonly require that the remittance be for personal rather than commercial use. Medicine and Medical Products Informational Materials Sanctions are imposed for political reasons, often with the objective of changing the behavior, or even the government, of a target pg. 7 country. The free flow of information can aid in this process. Accordingly, sanctions regimes and programs frequently exempt informational materials– books, music, movies, and information in general–from the reach of sanctions. Medicine and Medical Products Travel and Travel Expenses Sanctions may or may not include a prohibition on travel to sanctioned countries. The United States, for example, prohibits travel by U.S. nationals to Cuba or North Korea, with certain exceptions. Travel to Iran or Syria, on the other hand, is allowed. Where travel is not prohibited, sanctions laws generally include an exemption for travel expenses, with the requirement that the expenses be directly related to travel. Medicine and Medical Products Overflight Payments Countries generally charge for the right to pass through their airspace. Rerouting flights to avoid sanctioned countries is in many cases simply not practical. For this reason, sanctions laws almost always contain an exemption for overflight payments. This exception also includes the right to pass through the airspace of a sanctioned country. Medicine and Medical Products Agricultural Products When countries impose sanctions on other countries, it is common for them to insist that their objective is to change the behavior of the government of the country, not to punish the population as a whole. Effectiveness and Unintended Consequences Licenses Governments may decide to allow transactions that would otherwise be forbidden by sanctions. This permission normally takes the form of a license. While the details of licensing vary by country, a license typically identifies who may perform the action; exactly what action may be performed (the sale of a particular product, the provision of services, etc.); who the product may be provided to; and how long the license is valid. Effectiveness and Unintended Consequences In the United States, there are actually two forms of licenses: specific or general. A specific license authorizes one transaction, or a series of transactions. The license applies only to the products and parties identified in the license, and usually has a set period. Effectiveness and Unintended Consequences A general license, on the other hand, is available to all parties meeting its conditions, and does not require an application. In this way, a general license resembles an exemption. Unlike exemptions, though, a general license may be valid only for a specified period. In addition, the authority administering the sanctions laws may be able to revoke a general license on its own, while changing an exemption may involve a change to the underlying sanctions law itself. Effectiveness and Unintended Consequences > pg. 8 Outside of the U.S., it is the policy of the European Union (E.U.) to intervene when necessary, to prevent conflict or to respond to emerging crises by taking the form of restrictive measures or sanctions. Similarly, to the U.S., European sanctions may target governments of third countries, or nonstate entities and individuals, such as terrorist groups and terrorists. Russia: Bad for Business, Good for Homegrown Farming Whether a U.S. or E.U., the goal of sanctions is to impose a barrier in hopes of modifying unwanted behavior of a sanctioned party or country. Sanctions are meant to promote international peace and security but may also be applied to prevent conflict and to protect human rights. While the efficacy of sanctions is considered debatable by some, one thing is certain: sanctions have unintended consequences. Summary Below are some best practices that can be incorporated and adapted based on business needs: 1. Know Your Customers–maintain detailed information of your customers in a central location accessible to all business areas. The information should be current and frequently maintained. 2. Create and maintain a robust monitoring process. 3. Stay current with regulatory changes and communicate these changes promptly. 4. Seek solutions that integrate system functionalities to make process seamless for the business and the client regardless of your industry. Summary Economic sanctions are financial, physical, and other measures taken to prevent certain types of activities or to influence the behavior of countries, groups, or individuals. Sanctions may be imposed by a single country, a group of countries, or an international organization. The objectives of sanctions include o Preventing certain activities, such as terrorism and dealing in narcotics o Persuading governments to change their behavior o Penalizing (or punishing) the sanctions target o Making a symbolic statement Review Questions The history of sanctions dates back at least to classical Athens. Since the end of World War I, the use of sanctions has become more common as an alternative to military action. Sanctions can be imposed unliterally or multilaterally. Sanctions can be broad/comprehensive (“e.g. embargoes”) or targeted. A sanctions regime is the overall structure of a country’s sanctions laws, including 1. Which agency administers and enforces sanctions; 2. The targets of sanctions; and 3. Who must comply with the sanctions. A sanctions program refers to the specific sanctions against an individual country or category of persons. Sanctions can apply to countries, governments, regions, entities, unofficial groups, individuals, and vessels and aircraft. Typical sanctions include 1. Arms embargos 2. Prohibitions on exports 3. Prohibitions on imports 4. Prohibitions on investment 5. Prohibition on financial transactions 6.Prohibitions on making any financial resources pg. 9 available o Asset freezes o Travel bans. Sectoral sanctions are targeted sanctions that apply only to selected sectors of a country’s economy. o Sectoral sanctions may allow most transactions with the country Sanctions typically have certain exceptions for o Post and telecommunications o Humanitarian donations o Family remittances o Informational materials. A license authorizes a transaction that would otherwise be prohibited by sanctions. Sanctions can have unintended consequences, including o Causing suffering to the population of the target country o Providing an excuse for poor conditions by the government of the target country o Loss of export markets and sources of supply in the sanctioning country. SANCTIONS IMPOSERS AND TARGETS Legal Basis: The UN Charter Economic sanctions are imposed by both countries and international organizations. A sanctions regime is how a polity actually imposes sanctions. The regime includes a number of components: The legal sources of sanctions; The reasons for imposing sanctions; The targets of sanctions; The measures being applied, i.e., the types of sanctions; Who must comply with sanctions; and Compliance and enforcement. Legal Basis: The UN Charter United Nations From its creation, the United Nations contemplated the use of economic sanctions as an instrument to preserve peace without the need to resort to military force. Since then, the United Nations has declared sanctions in at least 31 cases. The targets have been primarily countries that threaten the peace, although the UN has also sanctioned organizations such as Al Qaeda as well. Legal Basis: The UN Charter Sanctions imposed by the UN do not automatically take effect. Rather, individual countries must implement them through national law or other action. Legal Basis: The UN Charter Legal Basis: The UN Charter The ability of the United Nations to impose economic sanctions is found in the UN Charter, the legal document that founded the UN. Article 41 The Process UN sanctions are imposed by the Security Council. The Security Council can take action to maintain or restore international peace and security under Chapter VII of the United Nations Charter. Sanctions measures, under Article 41, encompass a broad range of enforcement options that do not involve the use of armed force. The Process pg. 10 Security Council will consider a resolution imposing sanctions and creating a sanctions program. The resolution will specify exactly what measures are to be put into place. The Process Finally, the resolution will establish a committee to oversee the sanctions program in question. Resolutions in the Security Council are subject to veto by one of the permanent members. The Process The Committees carry out the actual work with respect to a sanctions program. Their role is to implement, monitor and provide recommendations to the Council on particular sanctions regimes. A committee may request advice and meet with various Panels of Experts. The Process The committee may also meet with Member States and international organizations. One important function of a committee is to identify exactly who is subject to sanctions. The Process Action by the Security Council is also needed to remove sanctions. The Security Council will lift sanctions when and if the situation underlying the imposition of sanctions has been resolved. Types of Sanctions UN sanctions do not automatically go into effect in individual countries, and the UN has no independent mechanism for enforcing sanctions. Rather, sanctions must be implemented by the individual members. Most UN members have a process where UN sanctions, including new designations, are incorporated into national law. Types of Sanctions Designation The United Nations can and does impose sanctions against entire countries, such as is currently the case with North Korea. More commonly, though, sanctions are imposed against individuals and entities. Types of Sanctions Types of Sanctions In the past, the UN has imposed very broad sanctions, including complete trade embargos. Since 2004, it has relied on more focused sanctions. Current sanctions methods include: travel bans; asset freezes; arms embargoes; Current Sanctions Programs bans on trade in certain commodities, such as diamonds, timber, petroleum, and charcoal; bans on exports of certain items to the country; bans on imports of selected items from the country; restrictions on exports to the country of goods and technology related to nuclear, ballistic missiles and other pg. 11 weapons of mass destruction; and bans on the export of certain luxury goods. Current Sanctions Programs The United Nations currently has 14 sanctions programs in place. Of these, 12 apply to countries, while two are directed against entities. Current Sanctions Programs De-listing Mechanisms The United Nations is very aware of the potential impact of inclusion on its sanctions list. As a consequence, it has two separate procedures by which individuals and entities can seek to be removed from the list. First, there is a specific “Focal Point for De-Listing.” An individual or entity (except for those on the ISIL and Al-Qaida list) can file an application with the Focal Point for De-listing seeking removal from a sanctions list. Legal Basis While the Focal Point receives and processes such requests, the actual decision whether to de-list rests with the relevant sanctions committee. Legal Basis Requests for removal from the ISIL and Al-Qaida lists are handled by the Office of the Ombudsman. Legal Basis The European Union is one of the major users of economic sanctions. The EU system is unusual in that, although sanctions are promulgated by and for the EU as a whole, they must be implemented and enforced by the individual members. In addition, EU members may impose sanctions that go beyond those of the EU itself. Legal Basis The EU refers to sanctions as both “sanctions” and as “restrictive measures.” Legal Basis The reasons the EU imposes sanctions include: Safeguarding values, interests and security Preserving peace Consolidating and supporting democracy, the rule of law, human rights, and principles of international law Preventing conflicts and strengthening international security Legal Basis The EU applies Sanctions within the framework of the Common Foreign Security Policy. This is the agreed foreign policy by the members of the EU. Sanctions are one element of this foreign policy. The legal basis for the imposition of sanctions by the EU is Article 215 of the Treaty on the Functioning of the European Union, which states that Legal Basis EU’s Common Security and Foreign Policy (CFSP) Legal Basis pg. 12 The EU is made up of 28 members states and seven different decision making bodies, most of which were established during the inception of the EU in 1958. Legal Basis This includes two legislative bodies called the Council of the European Union (the Council) and the European Parliament. Sanctions have become an increasingly important tool of the EU’s Common Security and Foreign Policy (CFSP). Legal Basis The EU has set out its fundamental sanctions policies in the Basic Principles on the Use of Restrictive Measures (Sanctions), which was issued by the EU Council in 2004. The Process While UN sanctions are not self-executing, this principle means that the EU will apply all UN sanctions. In addition, the EU will apply autonomous sanctions to meet various goals, including to fight terrorism and the proliferation of weapons of mass destruction a restrictive measure to uphold respect for human rights, democracy, the rule of law and good governance. The Process EU sanctions tend to be targeted towards specific individuals and entities, rather than whole regions or countries. The Process The Process As you can imagine, the structure of the European Union is rather complex. First of all it has member states, each with its own legislative, executive and judicial system. In the image below, you can see the main seven EU bodies: European Court of Justice, European Central Bank, European Council–this is a body with heads of the states of the member states, then Council of the EU-this is the council of national ministers, European Commission, the so-called executive branch, and finally the European Parliament and European Court of Auditors. The Process Action by the Council begins when it receives a joint proposal from the High Representative of the Union for Foreign Affairs and the EU Commission identifying a problem and recommending the imposition of restrictive measures. The Process The restrictive measures initially take the form of a Council decision. The decision will typically contain several elements, including The target of the restrictive measures (the country, individuals, or entities, which are usually identified in an Appendix to the decision) The reasons the measures are being imposed A direction that the Member States “shall take the necessary measures” to implement and enforce the restrictive measures A detailed description of the restrictive measures Any exceptions or pg. 13 exemptions to the measures that may apply The procedure for imposing restrictive measures on additional persons or entities The Process While the Council will inform the EU Parliament of the decision, no approval by the Parliament is required, so that the decision takes effect once it is issued by the Council. The Process The Council may subsequently issue additional decisions modifying the previous measures by, for example, adding new persons to the list. Decisions that broaden or restrict the scope of sanctions are simply called “Decisions,” while decisions adding or removing individuals and entities from the applicable sanctions list are described as “Implementing Decisions.” The Process Restrictive measures go into force when they are published in the EU Journal. Although sanctions are adopted at the EU level, the EU does not have the ability to enforce sanctions. Rather, they are enforced by national regulators at the national level. Types of Restrictive Measure Member States may impose sanctions beyond those imposed by the EU. This typically takes the form of the designation of additional individuals or entities under existing Council decisions, but could include broader measures as well. Types of Restrictive Measure Most EU restricted measures today are “targeted”. This simply means that they purport to channel harm toward specific public figures and entities, while maintaining the economic status quo of the country being sanctioned. Types of Restrictive Measure In some cases, though, the EU will impose restrictive measures on an entire region or country, as is true with respect to Crimea, North Korea, and Syria, for example. Types of Restrictive Measure The EU periodically publishes a compendium of all the restrictive measures in force. EU restrictive measures can be divided into four main categories: arms embargoes, travel bans, economic and trade measures, and financial measures. Types of Restrictive Measure Arms embargoes prohibit the sale weapons and related services to restricted individuals, groups, or states. Types of Restrictive Measure The definition of “arms” is fairly broad, and include weapons and ammunition, military vehicles and equipment, paramilitary equipment, and spare parts. In addition to a ban on arms sales, arms embargoes also include a prohibition on pg. 14 providing technical assistance and brokering services related to arms sales; the provision, manufacture, maintenance, or use of arms and related materials; and financing of such transactions. Types of Restrictive Measure Travel bans consist of restrictions or prohibitions on travel by designated individuals to the EU. Types of Restrictive Measure Economic measures may include a variety of measures, including prohibitions or restrictions on imports and exports of goods and services to countries, entities, or individuals. These are primarily goods and services that could be used by targeted actors to pursue a restricted objective. Types of Restrictive Measure trade measures may restrict exports of all goods, services, and technology to a specific sector or industry in the target country. Types of Restrictive Measure A wider prohibition is that on investment by EU nationals in any entity in Crimea. Sanctions may also prohibit investment by nationals of the target country in designated sectors of the EU economy, such as nuclear power or arms. As with trade in goods and services, restrictions on investment may apply to the provision of investment services as well. Types of Restrictive Measure The EU may also impose direct restrictions on trade and transportation. This can include prohibiting the use of EU-registered aircraft or vessels for trade with the country; transit through or export from the EU of goods or services that are not of EU origin; and denial of the right of vessels or aircraft from a target country to use EU ports or airports. Types of Restrictive Measure Financial measures prohibit financial transactions with the target, and may even require the freezing of assets belonging to sanctioned individuals or entities. In such cases, the Council decision will require that “{a}ll funds and economic resources belonging to, or owned, held or controlled by” a sanctioned party must be frozen. The definitions of both “funds” and “economic resources are broad. The definition of “funds” encompasses cash, checks, claims on money, drafts, money orders and other payment instruments; deposits with financial institutions or other entities, balances on accounts, debts and debt obligations; publicly-and privately-traded securities and debt instruments, including stocks and shares, certificates representing securities, bonds, notes, warrants, debentures and derivatives contracts; interest, dividends or other income on or value accruing from or generated by assets; credit, right of set-off, guarantees, performance bonds or other pg. 15 financial commitments; letters of credit, bills of lading, bills of sale; and documents evidencing an interest in funds or financial resources; Types of Restrictive Measure “Economic resources” can include practically anything of value, including “‘assets of every kind, whether tangible or intangible, movable or immovable, which are not funds but may be used to obtain funds, goods or services.” Types of Restrictive Measure The freezing of funds requires Preventing any move, transfer, alteration, use of, access to, or dealing with funds in any way that would result in any change in their volume, amount, location, ownership, possession, character, destination or other change that would enable the funds to be used, including portfolio management.” Types of Restrictive Measure Frozen funds must be placed in a blocked account, and not released without permission of the relevant national authority. Types of Restrictive Measure There are specific circumstances under which a sanctioned party may nonetheless have access to frozen funds, such as to pay for necessary living expenses. Targets of Sanctions (CSS) 52 Financial sanctions may also prohibit EU persons from making any “economic resources” available to the sanctioned party. Such a restriction prohibits basically all transactions with a sanctioned person. Targets of Sanctions An even more targeted type of financial sanctions are so-called “sectoral sanctions,” which prohibit EU nationals from buying, selling, or trading in transferable securities, money market instruments, or equity of certain Russian banks and energy companies. In such cases, only the designated types of transactions are banned; all other transactions are legal. Targets of Sanctions Licenses The competent national authorities can issue licenses authorizing transactions that restrictive measures would otherwise prohibit. In cases of asset freezes, the authority may allow the release of funds for certain basic purposes, including 1. Meeting basic needs, including food, housing, medicine and medical care, insurance premiums, and utilities; 2. The payment of legal fees; and 3. The payment of certain claims following a decision by a judicial or arbitral authority. National authorities may also authorize other prohibited transactions, depending upon national law. Targets of Sanctions Targets of Sanctions As noted above, the EU prefers to target sanctions as narrowly as possible to maximize their impact and to avoid negative consequences for “innocent bystanders.” Targets of Sanctions pg. 16 Individual Member States maintain their own sanctions lists, which may include additional names. In addition, Member States may request that particular persons or entities be added to the EU list. This proposal is typically submitted to, and initially reviewed by, the EU Presidency. Third states may also request designation. The request for designation must be supported by credible evidence supporting the request. The request, with the supporting information, then circulates through the Member States for review. In the case of terrorism designations, for example, the proposal is submitted to the CP 931 Working Party. After reviewing the information, the Working Party makes its recommendation to the Permanent Representatives Committee (“COREPR”). If the COREPR endorses the recommendation, it is forwarded to the EU Council for final approval. Targets of Sanctions Persons and entities on the sanctions list can seek to be delisted by applying to the appropriate committee. They can also seek legal redress through national courts or the EU Court of First Instance. While courts can review whether the legal criteria for listing, such as support by credible information, were satisfied, they cannot second-guess the political decision to add a person to the sanctions list. EU Sanctions Programs EU sanctions, and can do things prohibited for their EU parents or subsidiaries. Determining what is and is not allowable under such circumstances is complicated, and may depend upon the form of legal organization and the extent to which EU persons, including the EU parent, are involved in either general decisions or specific transactions. Branches abroad of EU companies, on the other hand, are considered to be EU nationals. Persons of any nationality who are physically present in the EU must also comply with EU sanctions. EU Sanctions Programs The EU currently has in place sanctions programs directed at 34 countries, although in most cases the restrictive measures are directed at individuals and entities rather than being country-wide. Sanctions are also in place with respect to various terrorist groups. EU Blocking Statute The EU does not have specific requirements for systems for complying with EU sanctions. Nor do the individual members. The EU has provided draft guidance on best practices for internal compliance programs (“ICPs”) for dual- use regimes EU Blocking Statute The core elements of an effective compliance system, and the principles underlying those elements, include: 1. Top-level management commitment to compliance: “Effective ICPs reflect a top-down process whereby the company’s top-level management gives significance, legitimacy, and organizational, human and technical resources for the corporate compliance pg. 17 commitments and compliance culture.” 2. Organization structure, responsibilities and resources commensurate to the entity’s risk profile: “Sufficient organizational, human and technical resources are essential for effectively developing and implementing compliance procedures. Without a clear organization structure and well-defined responsibilities, an ICP risks suffering from lack of oversight and undefined roles. Having a strong structure helps organisations work out problems when they arise and prevent unauthorized transactions from occurring.” 3. Training and awareness raising: “Training and awareness raising … is essential for staff to duly perform their tasks and take compliance duties seriously. 4. Transaction screening process and procedures: “In terms of operational implementation, transaction screening is the most critical element of an ICP. This element contains the company’s internal measures to ensure that no transaction is made without the required license or against any relevant trade restriction or prohibition. The transaction screening procedures collect and analyze relevant information concerning item classification, transaction risk assessment, license determination and application, and post-licensing. Transaction screening measures also allow the company to develop and maintain a certain standard of care for handling suspicious enquiries or orders.” 5. Performance review, audits, reporting and corrective actions: “An ICP is not a static set of measures and therefore must be reviewed, tested and revised if proven necessary for safeguarding compliance. Performance reviews and audits verify whether the ICP is implemented to operational satisfaction and is consistent with the applicable national and EU export control requirements. United Kingdom Enforcement Although the EU has deployed sanctions extensively, it has relatively little experience in enforcing them. As noted above, it is left to the Member States to ensure that their nationals comply with EU sanctions. The enforcing agencies and the penalties for violation are established by Member State laws and regulations, and vary across the EU. United Kingdom United Kingdom As of the writing of this guide, the United Kingdom was still in the EU, and was still subject to EU sanctions laws. Now that the U.K. has formally triggered the process of exiting the EU, the future effect of EU laws involving sanctions is unknown. In the meantime, the UK has implemented probably the most independent and farreaching system of sanctions enforcement in the EU. United Kingdom The OFSI keeps a list of ‘designated persons’, or ‘targets’. A designated person means anyone, whether an individual, company or country, that is pg. 18 subject to financial sanctions and appears on the OFSI’s “consolidated list of targets”. United Kingdom To fall within the OFSI’s enforcement of sanctions, there has to be a U.K. connection to the breach, or so-called “U.K. nexus”. As the breach does not have to occur within U.K. borders, such a nexus is not a difficult one to create. The following situations are just some examples of what can create a U.K. nexus: a U.K. company working overseas; an international transaction clearing or transiting through the U.K.; an action by a local subsidiary of a U.K. parent company; or purchase/sale of financial products or insurance on U.K. markets, even if held or used overseas. United Kingdom the UK has created the new Office of Financial Sanctions implementation (OFSI) (replacing the HM Treasury’s Asset Freezing Unit), which is responsible for the implementation and administration of international financial sanctions in the UK. The Department for Business, Innovation & Skills (BIS) is responsible for trade sanctions. The OFSI, a part of Her Majesty (HM)’s Treasury Department of the U.K. government, is the authority for the implementation of financial sanctions in the U.K. Current Implementation of UN and EU Sanctions in the UK Currently, when sanctions are imposed by the UN or the EU, the UK acts on its international obligations to give effect to the sanctions in UK law. UN sanctions are implemented by the EU and, once implemented through EU regulation, they take direct legal effect in the UK. Current Implementation of UN and EU Sanctions in the UK At a domestic level, the UK makes statutory instruments (UK regulations) to criminalize breaches of financial sanctions and to impose penalties for breaches of EU regulations. Implementation of UN and EU Sanctions in the UK, Post-Brexit Following its departure from the EU, however, the UK will be at risk of breaching its international obligations if a way forward is not agreed. With that in mind, the UK Parliament has passed the Sanctions and Anti-Money Laundering Act 2018 (‘SAMLA’), which received royal assent on 23 May 2018. Implementation of UN and EU Sanctions in the UK, Post-Brexit As to EU sanctions, it is likely that EU sanctions measures will also be transposed into UK law. According to the EU Withdrawal Act 2018, the current sanctions regimes in effect on the date of the UK’s departure from the EU will form part of domestic law on and after exit day. United States The United States utilizes sanctions to achieve a number of objectives, lie preventing certain types of activities, such as terrorism, narcotics trafficking, pg. 19 and weapons proliferation, and punishing violations of human rights, democracy, and the rule of law. It also uses sanctions to achieve foreign policy goals, although those goals are usually described in terms of preventing terrorism, weapons proliferation, etc. Each of the different sets of sanctions is referred to as a “program.” While most programs, including those that appear to address whole countries, are directed only at individuals or entities, several countries, including Cuba, Iran, North Korea, and Syria, are subject to broad embargos. United States The United States is unique in that some of its sanctions programs purport to require compliance by non-U.S. individuals and entities, giving them extraterritorial effect. United States Like the European Union, the United States has three general approaches to sanctions: list based, country based, and sectoral. OFAC The sanctions laws are connected to, but legally apart from, the U.S. export control laws. Sanctions laws are administered and enforced primarily by the Office of Foreign Assets Control (“OFAC”). OFAC OFAC OFAC is a small agency within the U.S. Department of Treasury. It acts under Presidential wartime and national security authorities as well as authority granted under specific legislation. OFAC administers and enforces U.S. economic sanctions based on U.S. foreign policy and national security goals. OFAC OFAC administers over 20 sanctions programs, all with a foreign focus/ nexus. There has been unprecedented enforcement in recent years following increase of statutory penalties. OFAC OFAC is the agency primarily charged with administering and enforcing economic sanctions on behalf of the government of the United States OFAC OFAC targets: Foreign countries and regimes Non-state actors like terrorists, international narcotics traffickers, WMD proliferators, indicted war criminals, or transnational criminal organizations And the support networks affiliated with these targets OFAC OFAC is inside the Department of the Treasury, in particular inside the Office of Terrorism and Financial Intelligence. OFAC pg. 20 As you can see, OFAC is inside the Office of Terrorism and Financial Intelligence (TFI). OFAC The main goal of TFI is to sever the lines of financial support to international terrorists, WMD proliferators, narcotics traffickers, money launderers, and other threats to the U.S. national security. OFAC The Bureau of Industry and Security (“BIS”), an agency within the Department of Commerce, administers most U.S. export control laws. The State Department regulates exports of arms. The State Department may also play a role in designating individuals or entities as targets for sanctions. Along with OFAC, the Department of Justice is involved in enforcement of the sanctions laws, especially if a violation rises to the level of a crime. Finally, the Federal Reserve to some extent oversees and enforces sanctions compliance by banks. Legal Basis The legal basis for the imposition and enforcement of economic sanctions in the United States is Article I of the U.S. Constitution, which gives Congress the power to regulate commerce with foreign nations. Legal Basis Congress has in turn passed a number of statutes that impose specific sanctions and, more generally, delegates broad powers to the President (and, through him, the agencies of the Executive Branch) to impose and enforce sanctions. The two main statutes that confer on the President the broad ability to impose sanctions include Legal Basis 1. Trading with the Enemy Act (TWEA). TWEA, which dates back to 1917, gives the President the authority to prohibit or regulate trade, investments, remittances, travel and virtually any other economic transactions with any designated country or its nationals. The U.S. sanctions against Cuba were based on TWEA. 2. International Emergency Economic Powers Act (IEEPA). IEEPA authorizes the President to declare national emergencies in response to a specific threat. Having declared an emergency, the President has the power, among other things, to regulate property belonging to foreign persons that is subject to the jurisdiction of the United States. Most country sanctions programs, as well as sanctions against individuals and entities, are imposed under the authority of IEEPA. The Process The Process Sanctions can be imposed legally in several different ways. These include statutes, Executive Orders, and regulations. The Process pg. 21 Statutes Statutes are measures enacted by Congress and signed into law by the President. Statutes are superior to all other forms of law except the Constitution. Statutes can impose sanctions directly. Section 103 of Cuban Liberty and Democratic Solidarity (Libertad) Act of 1996, for example, directly prohibits U.S. persons3 from providing indirect financing for certain types of transactions involving Cuba. Such a direct imposition of sanctions by statute is relatively uncommon, though. The Process Congress does not itself designate the persons subject to sanctions. However, if the President who determines that a foreign person has engaged in the prescribed conduct and imposes sanctions. This will normally be done by an announcement by OFAC that an identified person has been designated as a Specially Designated National, and is subject to the sanctions set forth in the statute. The Process Sanctions against many countries, are imposed under the authority of IEEPA and other, more country-specific statutes. The Process Executive Orders The immediate legal authority for the imposition of sanctions usually takes the form of an Executive Order issued by the President. While an Executive Order must be based on power delegated to the President by a statute, Congress does not review or approve Executive Orders The Process Three aspects of an Executive Order like this are noteworthy. First, the President or one of the Secretaries decides whether a person is subject to the sanctions set forth in CAATSA. Although the Order states that the President or the Secretaries “shall” act in such a case, it is left to them to decide what actions are necessary to enforce the sanctions. Finally, they can decide which sanctions to apply. This leaves the President a great deal of flexibility in deciding who to impose sanctions on, and what sanctions to impose. The Process Regulations Both statutes and Executive Orders tend to impose sanctions in fairly broad terms. The actual administration of sanctions, however, usually requires a greater level of detail. This is provided in the form of regulations issued by OFAC. The Process an Executive Order may direct OFAC to promulgate regulations with respect to a particular sanctions program. The Process pg. 22 Regulations do not normally provide the authority to designate persons as being subject to sanctions, though; this is usually done through an Executive Order. The Process Guidance, interpretive guidance, and FAQs do not have the force of law. However, they do reflect OFAC’s interpretation of statutes, Executive Orders, and regulations, as well as OFAC’s conclusions regarding the responsibility of U.S. persons and others for compliance with U.S. sanctions laws. In the United States, courts traditionally give great deference to an agency’s interpretation of the laws. Finally, anyone can request advice from OFAC on either broad topics, or on whether a particular transaction would violate U.S. law. While OFAC’s response is not necessarily binding, such a response is again a strong indication of how the agency interprets and applies U.S. sanctions laws. For this reason, proceeding with a transaction that OFAC has indicated it believes is illegal may expose the parties to the transaction to a real risk of violating U.S. law. Types of Sanctions United Nations Sanctions The United States does not automatically apply UN sanctions. As a practical matter, however, the United States normally incorporates UN sanctions into domestic law very quickly. U.S. sanctions are much broader than those imposed by the UN, though. Types of Sanctions Types of Sanctions The types of sanctions used by the United States resemble those utilized by the EU. These sanctions include arms embargoes, trade sanctions, financial sanctions, travel bans, and asset freezes. Unlike the EU, U.S. sanctions tend to be much broader and less targeted, in the sense that several countries are subject to general embargos of trade and finance. The United States evinces less concern for the impact of sanctions on the population of countries subject to embargos, although certain exceptions and general licenses seek to mitigate at least some of the humanitarian damage caused by sanctions. No single document contains all of the U.S. sanctions in force. The OFAC web site, however, contains comprehensive information on the U.S. sanctions under the various programs, including the applicable statutes, Executive Orders, regulations, guidance, and FAQs, as well as on general licenses. Types of Sanctions Blocking of Property is the most sweeping sanction applied by the United States. In this sense, “blocking” essentially means freezing the goods or services. This sanction is applied to individuals, entities, or others that have been designated by OFAC as “Specially Designated Nationals,” or SDNs. It pg. 23 may also be applied to entire governments, as is currently the case with North Korea, Syria, and Venezuela. Types of Sanctions The terms “property” and “interest in property” encompass practically anything of value, as the definition from the ITSR shows: Types of Sanctions Blocked property remains under the ownership of the sanctioned person or entity; the U.S. government has not seized the property. U.S. persons who gain control over funds belonging to a sanctioned person are required to place those funds in a separate interest-bearing account. The funds cannot be withdrawn or disbursed without the permission of OFAC. Restrictions on imports, exports, and investment. Arms embargoes prohibit the sale weapons and related services to restricted individuals, groups, or states. The U.S. “Munitions List” designates various goods, services, and technology as being defense articles or services. Exports of items on the Munitions List require a license from the State Department, which may act on the advice of the Department of Defense. Restrictions on imports, exports, and investment. The Munitions List covers 20 different categories of articles, services, and technology, including firearms; guns; ammunition; missiles, rockets, bombs, and mines; explosives; naval vehicles; military ground vehicles; military aircraft; military training equipment; personal protective equipment; military electronics; fire control and guidance equipment; various other materials; chemical and biological agents; spacecraft; nuclear weapons; directed energy weapons; gas turbine engines; and submarines. Restrictions on imports, exports, and investment. The Munitions List is incorporated into the International Trade in Arms Regulations (“ITAR”). Restrictions on imports, exports, and investment. ITAR is administered by the Directorate of Defense Trade Controls (DDTC), an agency within the State Department. DDTC must license all exports of goods, services, or technology on the Munitions List in advance. Restrictions on imports, exports, and investment. Investment A less common type of economic sanction is a prohibition or restriction on investment. Unlike the EU, the United States usually prohibits all investment after a certain date. Restrictions on imports, exports, and investment. “Investment” in this sense includes a commitment or contribution of funds or other assets, or a loan or other extension of credit. Such a sanction does not technically require a U.S. person to liquidate existing investments, but it may make it impossible for them to provide any additional funds or assets. pg. 24 Restrictions on imports, exports, and investment. Menu Sanctions Several U.S. sanctions statutes, including the Iran Sanctions Act and CAATSA, prescribe so-called “menu” sanctions as well. These sanctions are directed against persons who knowingly engage in certain types of activities, such as investment in or support for the Iranian petroleum sector. Restrictions on imports, exports, and investment. Sanctions Against Foreign Financial Institutions Some U.S. sanctions are directed specifically against foreign banks and other financial institutions. U.S. sanctions against Iran, North Korea, and Russia permit or require the President to impose sanctions against foreign financial institutions that engage in certain types of activities. These sanctions primarily take the form of restrictions or prohibition of the maintenance of correspondent and payablethrough accounts by U.S. financial institutions in favor of the foreign bank. Restrictions on imports, exports, and investment. Sectoral Sanctions Like the EU, the United States also imposes sectoral sanctions against certain entities in Russia and Venezuela. There are two main types of sectoral sanctions: Licenses and Exceptions Prohibition on dealing in debt and equity: U.S. persons are prohibited from dealing in debt or equity of a designated entity issued after a specified date. With respect to debt, the prohibition applies only if the debt has a maturity beyond a set limit. The applicable limit varies according to the sector in which the designated entity operates. “Dealing” encompasses virtually all possible actions in connection with debt or equity. Restrictions on exports: U.S. persons are prohibited from exporting goods, services, or technology to designated Russia entities in connection with certain types of petroleum projects. Licenses and Exceptions Evasion and Facilitation While not strictly a sanction, U.S. law prohibits any transaction that “evades or avoids, has the purpose of evading or avoiding, causes a violation of, or attempts to violate” a U.S. sanction. Licenses and Exceptions U.S. sanctions law also prohibits U.S. persons from facilitating transactions if it would be illegal for them to participate in the transaction directly. Section 560.208 of the ITSR provides standard language banning facilitation: {N}o United States person, wherever located, may approve, finance, facilitate, or guarantee any transaction by a foreign person where the transaction by that foreign person would be prohibited by this part if performed by a United States person or within the United States. Licenses and Exceptions pg. 25 Among other actions, the ban on facilitation would prevent a U.S. person from referring a business opportunity or transaction involving a sanctioned person, entity, or country to a non-U.S. person. The prohibition on facilitation does apply only to U.S. persons. Licenses and Exceptions Common exceptions and exemptions include Post and telecommunications Humanitarian donations Information and informational materials (including books, music, photographs, and film) Expenses associated with travel (where travel is allowed) Official business. Licenses and Exceptions General licenses are similar to exceptions. Despite the name, they are available to all persons, and no application is required. General licenses may be provided for in a regulation or issued separately by OFAC. They may provide very broad authorizations, allowing exports of whole categories of products, or very specific, such as an authorization to engage in specified types of transactions with a named entity. General licenses may be open- ended or limited to a certain period. Licenses and Exceptions Specific Licenses OFAC may also issue specific licenses. A specific license authorizes a designated party to engage in a transaction or series of transactions for a prescribed period of time. The license may also identify the individual entities otherwise subject to sanctions with which transactions can be conducted. The authorization provided by a specific license is available only to the licensee. Targets of U.S. Sanctions SDNs The most comprehensive U.S. sanctions apply to Specially Designated Nationals (SDNs)Pursuant to various statutes and Executive Orders, OFAC may designate individuals, legal entities, individual government agencies, vessels, and aircraft as SDNs. Targets of U.S. Sanctions The reasons for which a person or entity may be designated an SDN include: Engagement in or support of international terrorism Narcotics trafficking Arms proliferation Assistance in the development of weapons of mass destruction Suppression of democracy, human rights, and the rule of law Targets of U.S. Sanctions U.S. persons are generally prohibited from having any dealings with SDNs, and are required to block any property or interest in property of an SDN that comes under their control. Targets of U.S. Sanctions As with the EU, entities owned by SDNs are also subject to U.S. sanctions laws, even if they have not been separately designated. Under U.S. law, any pg. 26 entity that is owned 50 percent or more by any combination of SDNs is also considered an SDN by operation of law. OFAC does not apply a control test. However, under its 50 percent rule, OFAC will examine the chain of ownership. If an SDN or combination of SDNs owns 50 percent or more of an entity, that entity is designated as a matter of law. In turn, all entities in which that entity has a 50 percent or greater ownership is also designated. This can continue through several stages. The following example shows how an entity in which an SDN owns a minority share could nonetheless be treated as an SDN as well: 1. SDN Z owns 51 percent of Company A. Company A is also an SDN. 2. Company A owns 51 percent of Company B. Company B is also an SDN because Company A owns 51 percent of it, even though SDN Z owns only 26 percent of it. Targets of U.S. Sanctions Regions and Countries Regions and countries can also be the target of OFAC sanctions. At present, Cuba, Iran, North Korea, and Syria are subject to comprehensive or near-comprehensive sanctions that ban most transactions between the United States and U.S persons and these countries. In some cases, the United States has also frozen property belonging either to the governments of these countries, or to individual government agencies or entities. The United States has also imposed an embargo on economic relations with the Crimea region of Ukraine following its purported annexation into the Russian Federation. The United States maintains broad but not comprehensive sanctions against Russia and Venezuela, although sanctions against both have expanded over time. The U.S. sanctions involving the Darfur region of Sudan are directed at persons and entities committing massive human rights violations in Darfur, rather than at the Darfur region itself. Targets of U.S. Sanctions Sectoral Sanctions Identifications The United States imposes sectoral sanctions against certain designated companies in the finance, energy, and defense sectors of the Russian economy. These entities are designated as Sectoral Sanctions Identifications (SSIs). Targets of U.S. Sanctions U.S. law prohibits U.S. persons from dealing in the debt or equity of SSIs under certain circumstances, as well as exporting goods, services, or technology to SSIs in connection with certain petroleum projects in Russia. SSIs are subject only to the prescribed sanctions, and all other transactions with SSIs are legal. There is no requirement (or indeed, legal basis) to block their property. Targets of U.S. Sanctions pg. 27 U.S. persons are basically prohibited from having any dealings with Foreign Sanctions Evaders. Unlike SDNs, though, there is no requirement to block their property. Targets of U.S. Sanctions Foreign Financial Institutions Foreign financial institutions can be subject to U.S. sanctions if they conduct certain types of transactions involving Iran, North Korea, Russia, or Syria. These institutions are identified in the so-called CAPTA (Correspondent Account Payable Through Account List). At present, only one financial institution, the Bank of Kunlun in China, is on this list. Targets of U.S. Sanctions Secondary Sanctions U.S. law allows for the imposition of a range of sanctions against foreign persons and entities that engage in certain types of transactions with Iran, North Korea, Russia, and Syria. These sanctions range from the menu sanctions described above to mandatory designation as an SDN. Individuals and entities with whom transactions can give rise to secondary sanctions are identified as such in the SDN list. Who Must Comply with U.S. Sanctions? U.S. sanctions also apply to any person who is physically present in the territory of the United States, regardless of their nationality. This remains true as long as they are present in the United States. Similarly, U.S. sanctions laws apply to any business a foreign entity does in the United States, even if it has no physical presence in the United States. U.S. Sanctions Programs U.S. Sanctions Programs The United States currently has in place 31 different sanctions programs. The scope of these programs vary widely. Most involve the designation of individuals and entities as SDNs in response to actions that undermine the goals of the program. To stress that sanctions are not directed at the country as a whole, many of these programs are described as “Related,” U.S. Sanctions Programs Countering America's Adversaries Through Sanctions Act of 2017 (CAATSA) CAATSA imposes sanctions against a number of countries, including Iran, North Korea, Syria, and Russia. OFAC nonetheless treats certain sanctions provided for under CAATSA as a separate sanctions program. U.S. Sanctions Programs foreign subsidiaries of U.S. companies are subject to U.S. sanctions laws regarding Cuba as well. This means that these subsidiaries are banned by U.S. law from doing business that is completely legal under the laws of their country of organization. The United States does not, however, apply any secondary sanctions with respect to Cuba. U.S. Sanctions Programs pg. 28 Exports: Exports of U.S. origin products and exports from the United States to Cuba are prohibited without a license. Such a license can cover only exports of U.S. origin goods or services. There are exceptions for informational materials, for donations of food, and for agricultural products. The exception for agricultural commodities applies only to specified products. U.S. Sanctions Programs > Page 91 · Location 1557 Banking: Despite the general embargo on trade and financial transactions with Cuba, some banking relationships with Cuba are allowed. U.S. banks can open correspondent accounts for Cuban banks. They can also process payments on credit and debit cards for travel expenses incurred during authorized travel to Cuba. Shipping: U.S. ships are not allowed to call on Cuban ports, and Cuban ships cannot enter U.S. waters. Third-country ships that call on Cuban ports are banned from loading or unloading cargo in the United States for 180 days after the date of departure from Cuba. Claims against Third Parties: At the time of the Cuban Revolution, the new government seized a great deal of property belonging to persons who had fled Cuba. Some of this property may have subsequently been sold to third parties outside of Cuba. U.S. law allows for the owners of such property to sue these buyers, as well as others who use property seized by the Cuban government. The United States had long suspended this right, but it was reinstated in 2019. The first suit filed was against Carnival Cruise Lines, which docks at property in Havana that a U.S. citizen claims was expropriated from his family. Other exceptions: Mail and telecommunications between the United States and Cuba are allowed, as are transactions involving information and informational materials. Cyber-Related U.S. Sanctions Programs Foreign Interference in a United States Election Sanctions This program was instituted in response to a finding of attempts by Russia to interfere in the 2016 U.S. Presidential election. Under this program, the President can apply a range of sanctions to individuals and entities (“persons”) found to have interfered in U.S. elections, U.S. Sanctions Programs Global Magnitsky Sanctions These sanctions authorize the designation as SDNs of persons anywhere in the world who commit serious human rights abuses or who engage in corruption. U.S. Sanctions Programs An indication of the complexity of the Iran sanctions is that there are four separate sets of sanctions regulations and 24 separate Executive Orders imposing sanctions on Iran. The main sets of regulations are the Iranian Transactions and Sanctions Regulations, which cover transactions by U.S. pg. 29 and some non-U.S. persons, and the Iranian Financial Sanctions Regulations, which apply primarily to non-U.S. financial institutions. U.S. Sanctions Programs The Iran sanctions may also apply to non-U.S. persons. As discussed below, if a non-U.S. person engages in certain types of conduct, the United States may impose penalties on it. These types of conduct include providing material support for certain designated activities or knowingly engaging in significant transactions. Iranian sanctions apply to the territory of Iran and the Iranian government. They do not apply to Iranian nationals who can prove that they reside outside Iran. U.S. Sanctions Programs Exports of civil aircraft, parts, and related services to Iran require a specific license. Such exports were formerly subject to a favorable licensing policy, but this policy was revoked in 2018 as part of the Trump Administration’s general tightening of sanctions against Iran. Imports: All imports from Iran are prohibited without a license. The only exceptions are for gifts and for informational materials already in existence. Investment: U.S. persons cannot make any investment in Iran, or in entities owned or controlled by the Iranian government. U.S. Sanctions Programs of real or personal property located in Iran that belong to a U.S. person living expenses of U.S. persons residing in Iran Travel: Travel by U.S. persons to Iran is allowed. Payment of ordinary travel expenses while traveling in Iran is also allowed. Other exceptions: Mail and telecommunications between the United States and Iran are allowed, as are transactions involving information and informational materials. Secondary sanctions: In addition to the above sanctions, which apply to U.S. persons (and foreign entities owned or controlled by them), the United States imposes a range of so-called secondary sanctions. These are sanctions directed at non-U.S. persons for engaging in certain types of activities. In general, the United States may impose sanctions if a non-U.S. person provides material support for, or engages in significant transactions involving, the following sectors of the Iranian economy: Energy Petroleum and petroleum products Shipping Shipbuilding Automotive production Iron, steel, aluminum, or copper U.S. Sanctions Programs most cases, the application of secondary sanctions requires that the foreign person either provide material support or engage in a “significant” transaction. OFAC has not defined “material support.” In assessing whether a transaction is significant, OFAC will consider the following factors: 1. the size, number, and frequency of the transaction(s); 2. the nature of the transaction(s); 3. the level of awareness of management and whether the transaction(s) are part of pg. 30 a pattern of conduct; 4. the nexus between the transaction(s) and a blocked person; ( 5. the impact of the transaction(s) on statutory objectives; 6. whether the transaction(s) involve deceptive practices; and 7. any other relevant factors U.S. Sanctions Programs Rough Diamond Trade Controls The United States prohibits the importation of rough diamonds from countries that are not parties to the Kimberley Process Certification Scheme, which ensures that diamonds are produced from reputable source, and are not used to support organizations engaging in violence or human rights violations. U.S. Sanctions Programs Exceptions: There are a number of exceptions to the Syria sanctions, including Exports of designated food and medical products from the United States to Syria Non-commercial personal remittances to or from Syria Transactions involving U.S. persons resident in Syria The export of goods and services in support of humanitarian activities in Syria Telecommunications and mail Transactions involving Syrian diplomatic missions in the United States Third-country diplomatic and consular funds transfers U.S. Sanctions Programs Secondary Sanctions: The United States may designate as SDNs individuals or entities providing material support to the Syrian government. The United States has designated a number of Russian banks under this provision. Under CAATSA, the United States may also impose sanctions on non-U.S. persons exporting, or supporting the exportation, of arms and related materiel to Syria. U.S. Sanctions Programs uniquely subject to sectoral sanctions. These are fairly narrowly-targeted sanctions, similar to those imposed by the European Union, that prohibit only certain types of transactions with designated companies. The U.S. sectoral sanctions are set forth in four directives. U.S. Sanctions Programs Directive 1 prohibits U.S. persons from dealing in equity of designated Russian banks issued after a fixed date. It also prohibits U.S. persons from dealing in debt of these same Russian persons with a maturity of greater than 14 days, again issued after a date identified in the Directive. U.S. Sanctions Programs Directive 2 is similar to Directive 1, but applies to the debt of designated energy companies with a maturity of more than 60 days. Directive 2 does not apply to equity, so that U.S. persons are free to buy and sell shares in the firms subject to Directive 2, such as Gazprom. U.S. Sanctions Programs pg. 31 Directive 3 prohibits U.S. persons from dealing in debt with a maturity of longer than 30 days of designated companies in the Russian defense sector. U.S. Sanctions Programs Directive 4 prohibits the export of goods, services, or technology from the United States to certain designated Russian energy companies where the item is to be used in support of the exploration for or production of petroleum from deepwater, Arctic offshore, or shale projects in the Russian Federation. U.S. Sanctions Programs Banking and finance: In general, most banking transactions with Venezuela are allowed. However, U.S. sanctions prohibit certain types of transactions involving the debt or assets of the Venezuelan government, including the purchase of any debt owed to the Government of Venezuela, including accounts receivable; any debt owed to the Government of Venezuela that is pledged as collateral, including accounts receivable; and the sale, transfer, assignment, or pledging as collateral by the Government of Venezuela of any equity interest in any entity in which the Government of Venezuela has a 50 percent or greater ownership interest. U.S. Sanctions Programs Exceptions: There are currently 34 general licenses applying to Venezuela. Among other things, these allow certain transactions with PdVSA; authorize U.S. persons to wind down contracts with the Venezuelan government and Venezuelan state-owned entities; and exempt CITGO, a U.S. oil company owned by the Government of Venezuela, from the blocking of Venezuelan government assets so that it can continue in business. Enforcement U.S. persons are subject to certain reporting and record-keeping requirements. Anyone who blocks (i.e., freezes) property is required to file a report with OFAC within 10 days. The same is true of persons, primarily banks, who reject transactions that cannot be performed, but where blocking is not required, as with many transactions involving Iran. These reports must be filed within 10 days as well. U.S. persons are required to keep records of all transaction subject to sanctions, including those authorized by licenses or subject to an exemption from the sanctions laws, for five years. The same requirement applies for those holding blocked property. Enforcement Enforcement U.S. persons, and in some cases non-U.S. persons, are responsible for complying with U.S. sanctions laws. Sanctions enforcement in the United States occurs mostly at the federal level, but New York state in particular may also be involved. Enforcement pg. 32 Although it does not impose any requirements regarding a sanctions compliance system, OFAC has issued “A Framework for OFAC Compliance Commitments.” Enforcement OFAC identifies the main components of a sanctions compliance system as including: 1. Management commitment to sanctions compliance; 2. A risk assessment identifying the entity’s sanctions risks; 3. A system of internal controls that mitigate the identified risks; 4. Procedures for testing and auditing the functioning of the system; and 5. Training regarding both substantive sanctions requirements and the operation of the sanctions compliance system. Financial Action Task Force Primary enforcement is by OFAC. The Department of Justice may be involved, though, if a case is sufficiently serious. The Bureau of Industry and Security is the primary enforcer of the U.S. export control laws. Because of the interaction between sanctions and export control laws, it may work with OFAC in some cases. Financial Action Task Force FinCen, the U.S. financial intelligence agency, which is also located with the Treasury Department, is primarily responsible for enforcing the anti-money laundering laws, but much of its guidance is applicable to sanctions as well, and it publishes important advisories on sanctions topics. Financial Action Task Force Banks are subject to their own regulatory regime. While the primary bank regulator at the federal level in the United States is the Office of the Comptroller ofthe Currency, the Federal Reserve is also involved, especially in sanctions cases. Financial Action Task Force for banks with a New York presence, the New York Department of Financial Services has been very active in investigating banks where it deemed sanctions violations were also violations of New York’s business records laws. Financial Action Task Force Russia In accordance with Federal Law No. 281-FZ dated 22 December 2006 On Special Economic Measures, Russia implements UN sanctions with presidential decrees. Resolution of the Government of the Russian Federation No 778 dated 7 August 2014 (as amended) have imposed a ban on import of certain listed agricultural products, raw materials, foodstuffs from the United States of America, the European Union countries, Canada, Australia, Norway, Ukraine, Albania, Montenegro, Iceland, Liechtenstein. In addition Russia has introduced also travel bans against certain EU, American and Canadian politicians and military leaders from entering to Russia. pg. 33 Financial Action Task Force The Federal Financial Monitoring Services has a list of entities and individuals against whom there is evidence of participating in extremist activities or terrorism. Financial Action Task Force Financial Action Task Force The Financial Action Task Force (FATF) is an inter-governmental body established in 1989 by the Ministers of its Member jurisdictions. Members are currently 37 jurisdictions and 2 regional organizations, representing most major financial centers in all parts of the globe. Financial Action Task Force The objectives of the FATF are to set standards and promote effective implementation of legal, regulatory and operational measures for combating Financial Action Task Force money laundering, terrorist financing and other related threats to the integrity of the international financial system. Financial Action Task Force The FATF does not impose sanctions, but is a “policy-making body” which works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas. This includes financial sanctions. Financial Action Task Force The FATF monitors the progress of its members in implementing necessary measures, reviews money laundering and terrorist financing techniques and counter-measures, and promotes the adoption and implementation of appropriate measures globally. Financial Action Task Force The FATF document “International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation” (the FATF Recommendations) includes a few recommendations related to financial sanctions: Recommendation 6: Targeted financial sanctions related to terrorism and terrorist financing Countries should implement targeted financial sanctions regimes to comply with United Nations Security Council resolutions relating to the prevention and suppression of terrorism and terrorist financing. Financial Action Task Force In June 2013, the FATF issued a 19-page document “International Best Practices –Targeted Financial Sanctions Related to Terrorism and Terrorist Financing (Recommendation 6). The paper seeks to assist countries in developing and implementing targeted financial sanctions to prevent and suppress terrorist financing in accordance with the relevant UNSCRs and in a manner consistent with these fundamental principles, through a robust and transparent targeted financial sanctions regime. pg. 34 Financial Action Task Force Recommendation 6 requires each country to implement the targeted financial sanctions regimes to comply with the United Nations Security Council resolutions (UNSCRs or resolutions) relating to the prevention and suppression of terrorism and terrorist financing, including: UNSCR 1267(1999) and its successor resolutions (the Al-Qaida/Taliban sanctions regimes); UNSCR 1373(2001); and any other UNSCRs which impose targeted financial sanctions in the terrorist financing context. These resolutions require countries to freeze, without delay, the funds or other assets of, and to ensure that no funds or other assets are made available, directly or indirectly, to or for the benefit of, any person or entity either (i) designated by, or under the authority of, the United Nations Security Council (the Security Council) under Chapter VII of the Charter of the United Nations, including in accordance with the Al-Qaida/Taliban sanctions regimes4; or (ii) designated by that country or by a supra-national jurisdiction pursuant to UNSCR 1373. Financial Action Task Force Recommendation 7: Targeted financial sanctions related to proliferation Countries should implement targeted financial sanctions to comply with United Nations Security Council resolutions relating to the prevention, suppression and disruption of proliferation of weapons of mass destruction and its financing. These resolutions require countries to freeze without delay the funds or other assets of, and to ensure that no funds and other assets are made available, directly or indirectly, to or for the benefit of, any person or entity designated by, or under the authority of, the United Nations Security Council under Chapter VII of the Charter of the United Nations. Interpol The paper further explains that efforts to combat terrorist financing are greatly undermined if countries do not freeze the funds or other assets of designated persons and entities quickly and effectively. Nevertheless, in determining the limits of or fostering widespread support for an effective counter-terrorist financing regime, countries must respect human rights, respect the rule of law, allow due process, recognize and protect the rights of bona fide third parties. The paper stresses the importance of an effective freezing regime and has four sections: 1. Clear authorities and procedures for identifying and designating persons or entities 2. Due process: review, delisting and unfreezing 3. Post designation issues: freezing and prohibiting dealing in funds or other assets of designated persons and entities 4. Designated persons and entities: Compliance and access to frozen funds or other assets Interpol > Page 107 · Location 1877 pg. 35 Interpol The International Criminal Police Organization (Interpol) is an intergovernmental organization. It has 194 member countries, and it helps police in all of them to work together. Interpol enables the police forces in these countries to share and access data on crimes and criminals, and offers a range of technical and operational support. Interpol Interpol does not issue sanctions but it has formal procedures for cooperation with United Nations Sanctions Committees and issues so called “Special Notices” for individuals and entities subject to these sanctions regimes. Interpol Two of the UN Sanctions Committees most active in this regard are: The Sanctions Committee pursuant to resolutions 1267 (1999) and 1989 (2011): this Committee oversees sanctions concerning individuals and entities associated with ISIL (Daesh) and Al-Qaida. The Sanctions Committee pursuant to resolution 1988 (2011): this Committee oversees sanctions concerning individuals and entities associated with the Taliban; Interpol Special Notices are issued for individuals and entities that are subject to sanctions imposed by the UNSC. Its principal function is to alert national law enforcement authorities that at least one of these forms of sanctions apply: Assets freeze: freezing funds or other assets. There is no requirement to seize or confiscate assets; Travel ban: preventing an individual from entering or transiting through territories. There is no requirement to arrest or prosecute these individuals; Arms embargo: preventing the direct or indirect supply, sale or transfer of arms and related materials. Review Questions Summary Sanctions are imposed primarily by countries, but may be imposed by international organizations as well. The United Nations imposes sanctions on a number of countries, individuals, and entities. The UN does not enforce sanctions directly; rather, they must be implemented and enforced by UN member states. Sanctions in the EU are imposed at both the Union and the national level. The European Union generally uses targeted sanctions that are focused on specific individuals and entities, so avoiding harm to “innocent bystanders.” The EU does impose fairly broad sanctions against North Korea and Syria, though. The EU system has strong legal protections for sanctions targets. Actual enforcement of EU sanctions is by the Member States. The United States has the largest and most complicated system of sanctions in the world. Like the European Union, most U.S. sanctions are focused on individuals, entities, and organizations, including terrorists, drug dealers, weapons proliferators, and those undermining democracy and violating human rights. The United States imposes comprehensive sanctions against pg. 36 Crimea, Cuba, Iran, North Korea, and Syria. It imposes broad but less comprehensive sanctions against Russia and Venezuela. The FATF does not impose sanctions, but is a “policy-making body” which works to generate the necessary political will to bring about national legislative and regulatory reforms in financial crime areas, including financial sanctions. SANCTIONS EVASION: TYPOLOGIES AND SCHEMES Business Relocation What is ‘Sanctions Busting’? Commercial-based ‘sanctions busting’ occurs when sanctioned entities circumvent sanctions restrictions by finding replacement business partners or devising methods of maintaining existing relationships despite the sanctions. These strategies allow sanctioned entities to minimize the disruption and hardships that sanctions would otherwise impose, which undercuts the impact of the sanctions. Importance of International Cooperation Obscuring Transactions Not surprisingly, the fear of possible detection and punishment by sender governments will give firms a strong incentive to hide their sanctions-busting transactions. To that end, they may develop strategies for obscuring the point of origin or end-destination of products by employing complex transactions, front companies, illicit diversions, or smuggling tactics. They may also employ elaborately structured shell companies, fraud, money laundering, or informal financial networks to finance illicit or gray market transactions that violate sanctions. Stripping Stripping Banks and other financial institutions communicate through the exchange of electronic messages. For domestic transactions, the main systems used are EPA (in Europe) and ACH (in the United States). Internationally, banks communicate through the SWIFT system. Messages are used to do everything from provide information on a transaction to direct the actual transfer of funds. Different types of messages are used for different purposes. Internationally, the two most common message types are the SWIFT MT103, which is used for cross-border transfers of funds, and the MT202 COV, which is used for funds transfers between financial institutions. Resubmission of Rejected Transactions In some cases, some personnel in banks may wish to disguise transactions themselves, so as to fool their own screening systems, as well as those of correspondent banks. U.S. dollar transactions, for example, are almost always cleared through U.S. banks. Foreign banks that have decided that they want to do business that they knew was prohibited by U.S. sanctions, and would be stopped by their U.S. correspondent banks, have devised a variant of stripping. Rather than simply delete information, they substitute information in the relevant fields, such as by using a code word. If the name of one of the pg. 37 parties is on a sanctions list, for example, the relevant field in the payment message may simply say “customer” instead. Another example is the use of the bank’s name instead of the customer’s name in the relevant field. Resubmission of Rejected Transactions Red flags: Indicators that stripping may have occurred include Obviously missing relevant information Use of placeholders, such as “customer” Use of the bank’s own name in the customer field Statements such as “do not mention Iran connection” Resubmission of Rejected Transactions Resubmission of Rejected Transactions In some cases, as with the U.S. sanctions against Iran, a U.S. bank is required to reject a transaction, but not freeze the funds involved. If a bank rejects a transaction, another evasion technique is to resubmit the transaction, but after changing information in the message. This an be done by deleting the information that would tie the payment to a sanctioned party or country, or, again, but substituting new names for old. To counteract this, most banks use software that will identify resubmitted payments because the amounts or most of the parties are the same. Resubmission of Rejected Transactions The most basic way of evading screening is simply to delete–“strip” – information from a message that would reveal the presence of a sanctioned party. “Stripping” is the deliberate act of deleting or changing information from payment messages or instructions. Special Purpose Entities and Front Companies Use of Cover Payments For international transfers in particular, a transaction may include a “cover” payment between two banks. A Dutch bank sending funds denominated in U.S. dollars, for example, to a Mexican bank would probably route the transaction through a correspondent bank in the United States. The Dutch bank would send a “cover” payment to the U.S. bank, directing it to transfer funds from its account with the U.S. bank to an account at the Mexican bank’s correspondent bank in the United States. In the past, cover payment messages required less information than regular payment messages. Foreign banks might send a cover message to a U.S. bank that did not show the identity of all the parties involved. The U.S. bank would then routinely process a transaction that might actually be illegal under U.S. law. The mandatory use of the SWIFT MT202 COV message prevents this. Still, the use of cover messages other than the MT202 COV might be evidence of an attempt to evade sanctions. Special Purpose Entities and Front Companies Red flags: Evidence that a cover payment may have been used to conceal a sanctioned element include: Use of an MT202 message when an MT202 pg. 38 COV would normally be used Receipt of an MT202 message from a high risk customer Different payment instructions for U.S. dollar-denominated transactions Special Purpose Entities and Front Companies Use of Suspense Accounts Banks use suspense accounts to record transactions temporarily, until the final treatment of the transaction (i.e., its allocation to customer or other accounts) can be decided. If a bank is trying to disguise a sanctioned element, it may route sanctioned transactions through a suspense account, as such transactions do not normally pass through the bank’s filters. Red flags: A bank may be misusing a suspense account to evade sanctions if The customer associated with the transaction is not identified Anothe

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